You’re Getting Ripped Off

I guess it’s still a thing.

Capitalism = Disgusting

Richard Wolff, the leading Marxian economist in the United States, has dedicated his life to exposing the “truth about capitalism.” His talk, inspired by Karl Marx, disgustedly explains how capitalism works. His emphasis resides on the claim that workers are getting ripped off because they do not get paid their full marginal revenue product of labor, or the full value of what they produced. Their lower wage creates a surplus which goes to the “unproductive” capitalist. If you add up all the little surpluses created by thousands of workers, this adds up to a pretty large sum of extra money.

Now, what these evil capitalists do with that surplus value produced by the exploited workers is nothing short of appalling. Supposedly, a portion of the extra money goes to pay corporate taxes. But, they also pay managers to find ways of reducing the amount they pay to the government, essentially stealing from the government. Ugh! Some of the surplus goes to expanding the business, either in the form of a capital investment that automates production or by opening up shop in parts of the world that allow kids to get exploited! Other parts of the surplus can go to pay shareholders, the owners of the business, through dividends or they can skip out on paying the shareholders and throw the surplus into investment vehicles that will likely bring more profits to the few at the top. They also give a little to the political system to make sure that “democracy” is contained. Oh, and all these decisions are made by a handful of rich, greedy, slimy, board members that are voted in by the shareholders.

Great.

Ah, Little Socialist Businesses

Before we tackle some of that, we must first ask ourselves, “Why do firms exist in the first place?” There are a few different reasons posited by economists, but the leading theory is the one put forth by Ronald Coase. Firms exist to bring down the costs of contracting each little thing that needs to get done. Having to outsource everything (though, with the rise of sharing platforms and the internet this is changing) is costly inasmuch that metering and monitoring matter to efficient production.

Firms are also conducive to the cultivating and sharing of tacit knowledge. If every part of the production process is outsourced, the world loses out on important human capital accumulation that is found within firms. Streamlining processes, figuring out more efficient ways of doing things, and coming together for a common goal of sorts are inarguable benefits to the firm. However, the reason these little socialist experiments don’t expand to the size of the entire country’s economy is because they are subject to diminishing returns. It gets to a point where the cost minimizing aspect of bringing things under one roof start to reverse.

What I have a problem with is when he says that managers, board members, and shareholders, are not “productive.” They don’t make the cars. They don’t build houses. They don’t produce anything. While they may not install the doors on the car or throw a layer of paint on a wall, they are still very much part of the production process. Purchasing managers, for example, are in charge of making sure the intermediate goods are available to actually begin production at the firm. They are an important part of the ecological process of the modern economy as they bridge firms together.

Getting paid under the marginal product of labor wage also helps with income and financial security. It allows those “unproductive managers” to create futures contracts, smooth out production flows, balance the books, watch and track the production process, and a slew of other activities that keep the business profitable and the wages stable. They deal with issues that arise within and without the firm, from conflict resolution to economic dynamism and changes in the market.

Using Emotions Instead of Good Economics

Wolff’s disgust or anger or revulsion that arises when explaining the “truth about capitalism” is the only way he can effectively teach Marxian economics. He must invoke a strong feeling that is able to overcome the bad economics he spews to young minds and people around the country. What is even more unfortunate is that he isn’t laughed off the podium. Instead, his emotional discussion of the evils of capitalism and the virtues of socialism has influenced leaders like Yanis Varoufakis, whom I have discussed in a previous post! To his credit, I do agree that there is a great deal of control over the political system by powerful and rich folk. That isn’t necessarily a problem inherent with capitalism, but a problem of the state intervening into capitalism. The state is essentially a parasite that leeches onto the production of a capitalist system. So, the solution is to have the state (the people so he says) be in control of all the economic activity? Uhh…no thank you. This just exacerbates the problem.

The reason we have economic growth and an increased level of well-being in the world is due to capitalism. Attempts at using Marxian economics and philosophy to coordinate and plan economic systems have created misery and ended in failure. I’m happy to get “ripped off” by working in a system that has brought the most people out of poverty. Capitalism is not perfect; no economic system is. But it is the best thing to have happened to humans.

Advertisements

Share this:

Like this:

Published by Kevin D. Gomez

Kevin D. Gomez is an Instructor of Economics at Creighton University and Program Manager at the Institute for Economic Inquiry. He received his B.S. in Economics and Statistics from Florida State University and his M.A. from George Mason University. Trying to pay it forward by helping noneconomists make sense of the crazy world.
View all posts by Kevin D. Gomez

Archives

Archives

Advertisements

Welcome

Welcome to ReasonablEconomics where we try to make sense of the world using our economic toolkit. Here you will find commentary on current events and our day-to-day lives. Browse through the posts and check out our podcast, Katallaxy. Contact us with any questions, comments or post submissions!